Risk Management

Topics: United States dollar, ISO 4217, Currency Pages: 1 (305 words) Published: November 12, 2011
Risk Management Problem Set II

Risk Management Problem Set II
17-1 (Spot exchange rates) An American Business needs to pay (a) 10,000 Canadian dollars, (b) 2 million yen and (c) 50,000 Swiss francs to business abroad. What are the dollar payments to the respective countries? A) 10,000 ( Canadian \$) x .8437 ( U.S. \$/Canadian \$) =\$8,437 B) 2,000,000 (Yen) x .004684 (\$/Yen) = \$9,368

C) 50,000 (Swiss franc) x .5139 (\$/Swiss franc) = \$25,697. 17-2 (Spot exchange rates) An American business pays \$10,000, \$15,000, and \$20,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive? a) 10,000 (USD\$) x 1/.004684 ( Yen divided by USD) = 2,134,927.4 Yen b) 15,000 (USD\$) x 1/.5139 (Swiss franc divided by USD) = 29,188.56 Swiss franc c) 20,000 (USD\$) x 1/.8437 ( Canadian dollar divide by USD) = 23,705.11 Canadian \$ 17-5 You own \$10,000. The dollar rate in Tokyo is 216.6743. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars? The Tokyo rate is 216.6743 Yen divided by dollars

Arbitrage profits are possible with the assumption there is no transaction cost and the rate between Tokyo and New York are out of line. It is cheaper to purchase Yen in Tokyo. Buy Yen for the \$10,000 you own \$10,000 x 261.6743 = 2,166,743 Yen and then turn around and sell the Yen in New York at the predominant rate of 2,166,743 multiple by .004684 = \$10,149.02, thus the net gain is \$10,149.02 minus \$10,000 equals \$149.00